A proposed new cannabis tax would likely increase costs for consumers and further squeeze an “already struggling” industry, representatives said.
Gov. Gretchen Whitmer has suggested a wholesale tax on marijuana products, similar to an existing tax on tobacco products, as a means to raise another $470 million to help fund road repairs.
“The industry has grown exponentially thanks in part to Michigan’s industry-friendly taxes, the fourth lowest in the nation,” Whitmer said.
The governor’s new road funding plan didn’t specify the tax amount, leaving it “open to negotiation,” according to Whitmer’s staff. The tax itself is also up for negotiation.
Increasing the tax burden on the cannabis industry would “absolutely devastate the regulated market,” said Robin Schneider, executive director of Michigan Cannabis Industry Association, a trade organization representing more than 400 members statewide.
“We intentionally kept the tax rate low enough to compete with the illicit market,” Schneider said, referencing the 2018 ballot initiative that legalized recreational marijuana. “A wholesale tax would backfire and lead to less tax revenue because consumers would go back to the unregulated market where prices would be lower.”
Sales and job numbers painted a picture of success for Michigan’s cannabis industry in recent years.
But representatives say the market is oversaturated and prices are persistently low, resulting in revenue that can’t keep up with costs. That’s led to significant layoffs and facility closures for companies like PharmaCann’s Warren location, and Fluresh’s grow operation in Adrian.
Related: Michigan marijuana company Pincanna cuts jobs amid industry transformation
“Our members are struggling to turn even the slightest profit,” Schneider said.
Earlier this month, Michigan marijuana company Pincanna temporarily closed one of its operations and laid off workers. Robert Nusbaum, one of the company’s founding partners, said they’ll hire back as many workers as possible “when the market conditions in Michigan improve.”
If the state imposed a wholesale tax on cannabis, customers would likely see increased retail prices.
“I don’t see licensees eating it, they simply can’t eat it,” said Harry Barash, founder of Michigan Canna Pros, an industry networking organization. “They would have to pass it on to the consumer.”
Is cannabis utilizing a tax loophole?
When the governor announced her road funding plan on Monday, Feb. 10, she noted an intention to close a “loophole” that exempts the marijuana industry from wholesale tax.
Representatives of the industry say that’s an unfair and offensive claim.
Cannabis licensees currently pay a 10% excise tax on recreational marijuana and a 6% sales tax, but no wholesale tax. That’s different from tobacco products, which are taxed 10 cents per cigarette, 50 cents per cigar, and 32% of the wholesale price for other tobacco products.
As a result, Michigan’s prices are able to remain among the lowest in the nation. The average flower price in Michigan was second lowest in 2023 and 2024, behind only California, according to data compiled by Cannabis Business Times.
Related: Tax increases and budget cuts: How 2 proposals stack up to fix Michigan’s roads
Low prices are good for customers, but they make it difficult for businesses, which face significant tax requirements federally, explained Cassin Coleman, an industry consultant.
Cannabis businesses pay federal taxes on revenue, not net income, because their product is considered an illegal schedule I drug nationally. They can’t deduct business expenses, meaning they pay federal taxes even if they don’t turn a profit — unlike other business types.
“Even if the (wholesale) tax was 10%, for most companies we’re talking almost 50% of every dollar of revenue, not profit,” Coleman said. “Who could sustain those margins?”
Schneider said California serves as an example of what might happen in Michigan if it raises taxes on cannabis businesses. She theorized customers would move back to the unregulated market rather than pay the increased prices.
“California has a robust illicit market still and it’s because the taxes are so high,” she said.
How is the cannabis industry doing?
Between 2022 and 2023, Michigan’s sales increased 33% to about $3 billion, according to Whitney Economics’ 2024 jobs report. Jobs increased 39%, giving the state the largest year-over-year increase, and second-most total jobs behind California.
Sales numbers continued to grow in 2024, though at a slower rate. For the first time in November and December, more jobs were lost than created in two consecutive months, according to the state’s Cannabis Regulatory Agency.
Schneider said total sales look incredible, but too much product grown in Michigan has caused the “bottom to fall out,” leaving companies with low profits.
“We’ve oversaturated the market to the point you can’t recoup the cost of what it costs to grow, process, test, transport, pay employees, keep the lights on, pay state assessments,” she said. “The margins just aren’t there.”
Related: With billions spent, is Whitmer’s pledge to ‘fix the damn roads’ a broken promise?
Nationally, the cannabis industry is seeing growth, driven in part by a “steep-curve expansion” in Midwestern markets like Michigan, notes a report by Whitney Economics.
Taking a closer look, that success is more common amongst the younger markets.
States that have had longer periods of legal marijuana are seeing labor demand contract along with revenue and profit margins. That decline was due to an oversupply of cannabis, waning cannabis tourism, and struggles with high taxes.
As Michigan grapples with its shifting landscape, Schneider said she hopes state leaders work with the industry to improve business conditions, not make them worse. She said the solution is multifaceted but may include solving the overproduction issue and reexamining regulatory costs.
“That’s the conversation we were hoping to have this year, while this of course would pour fuel on a fire for our members who are in absolute panic,” she said.
“I just don’t think there’s a place to squeeze another half a billion out of our industry at this time.”
House Speaker Matt Hall, R-Richland Township, said he doesn’t think a tax increase is necessary to solve the state’s long-term road funding problem. His plan, introduced in November, focuses on shifting existing tax revenue and cutting corporate incentives.
“We have enough money,” Hall said Thursday, Feb. 13.
Gov. Gretchen Whitmer proposed a wholesale cannabis tax to help fund roads. Read More
